Billionaire’s Stock Defies Market Logic as a Shock Mexico Winner
(Bloomberg) -- Mexican billionaire Ricardo Salinas Pliego’s bank and appliance dealer Grupo Elektra weathered the coronavirus virtually unscathed so far, outperforming most other Mexican stocks amid trading volume that wilted to near-record lows.
Elektra’s share price rose to an all-time high last September, shortly after it became the fifth most valuable company in Mexico. It grew past major lender Grupo Financiero Banorte even though Elektra has one-sixth the total assets. Last year’s gains made Salinas Pliego, whose family owns 73% of Elektra stock, the country’s second richest man.
This year, shares have outperformed while many other Mexican stocks were hammered by the pandemic. From Feb. 21 to March 23, when pandemic fears sent Mexico’s S&P/BMV IPC index down 26%, Elektra was the best-performing stock on the benchmark, gaining 2%. It’s since lost some ground, falling about 5% since May 26 when it reported a 97% decline in net income due to a bad 7.2 billion peso ($320 million) loan. The shares fell 1.3% on Wednesday to close at 1,290.82 pesos, the lowest in more than 10 months.
One factor that’s helped the stock is a loan portfolio that grew four times faster than the banking-industry average after its financial unit Banco Azteca was tapped to help distribute President Andres Manuel Lopez Obrador’s new anti-poverty aid programs. While loans in Mexico’s banking system grew 4% last year, Banco Azteca’s portfolio grew 17%, according to government data.
But that boost does not seem to justify its price or its bigger market value than Banorte, said Santiago Arias, a fund manager focused on Latin American stocks at Credicorp Capital Asset Management in Chile. Elektra is trading at 25.8 times its earnings compared to 18 times for the average of the benchmark Mexican index.
“This does not make any sense. The company’s fundamentals have deteriorated much more than the stock price shows,” Arias said. “Nobody in their right mind would be buying this stock at those levels.”
Another notable part of Elektra’s recent gains was the stock’s low trading volume. Last year, volume was less than a third of 2018’s and nearly one-sixth of 2016’s. Its average volume in the past month is 53 times smaller than the median of the other stocks on Mexico’s benchmark index. Normally, when a stock climbs to a record price it is accompanied by rising trading volume, Arias said.
“If you have fewer investors out there willing to trade it, you just need one investor to move the price,” he said.
Elektra is a complex company to analyze. It has a chain of stores that sell products like TVs and refrigerators to the poor on low payment plans with big interest rates. Its bank unit accounts for nearly two-thirds of its revenue, according to data compiled by Bloomberg.
The stock price has held up even as other financial companies and retailers like department store operator El Puerto de Liverpool tanked on concerns the coronavirus shutdown could drive the country into the deepest recession since the Great Depression. Grupo Famsa, which also targets lower-income clients with financing plans and is a direct competitor of Elektra, has fallen over 50% since the beginning of February.
In a response to questions from Bloomberg News, Grupo Salinas spokesman Luciano Pascoe pointed to a 15% increase in revenue and 13% growth in its gross loan portfolio in the first quarter.
“This is an unequivocal sign that, even in the face of a complex and challenging situation, there are solid expectations about the future of the financial business and of our company as a whole,” Pascoe said.
A handful of other Mexican companies have performed better than Elektra since the crisis began, but they provide basic staples, like Gruma’s tortillas, Grupo Bimbo’s bread or Becle’s Jose Cuervo tequila.
Elektra, which relies on discretionary purchases by low earners on credit, has seen bad loans rise as hundreds of thousands of Mexicans lost their jobs. The share of bad loans on Elektra’s bank balance sheet rose to 11.9% in March, up from 2.9% a year ago, according to government data.
Elektra is the flagship company of Salinas Pliego, who also owns the country’s No. 2 TV network TV Azteca as well as closely held cable TV, energy and security companies. He de-listed Elektra and TV Azteca from U.S. markets last decade after he settled fraud charges brought by the U.S. Securities and Exchange Commission without admitting wrongdoing. He later won a bitter legal battle with Mexico’s stock exchange when it tried to kick Elektra off the country’s benchmark index in 2012 after a dispute about the size of its share float.
It’s hard to find analysts who cover the company. Following Salinas Pliego’s dust-up with U.S. authorities and his battle with Mexican regulators in 2012, major banks dropped coverage.
One possible reason why Elektra’s stock price rose to a record high last year could have been expectations that Banco Azteca would get a lift from being among the banks picked to distribute the president’s anti-poverty aid, said Carlos Hermosillo, who used to cover the stock for brokerage Actinver before leaving last year.
Banco Azteca has one of the biggest money-transfer businesses in the country and Mexicans line up outside its stores on the weekend when relatives working in the U.S. wire home funds after payday.
Now, many Mexicans receiving cash aid from Lopez Obrador’s new programs are using Banco Azteca to withdraw their funds, and many are opening accounts or making purchases when they do, said Hermosillo.
Elektra spokesman Pascoe said Azteca is “one of many” banks that are helping disperse funds and its participation in the program “derives exclusively” from its national presence with 1,800 branches “as well as the quality, reliability and efficiency of its operations.”
Hermosillo and Arias also pointed to two other potential factors behind the stock’s outperformance -- its small float and trading by the company’s own brokerage.
While 27% of the stock is not owned by Salinas Pliego and family, the actual free float is even smaller due to a huge equity swap bet that Elektra has on its own stock price. The swap, which the company has been rolling over for about 10 years, according to exchange filings, ties up millions of shares.
The effect of the swap was at the heart of the battle with the Mexican stock exchange in 2012. MSCI kicked Elektra off its Mexico index that same year after it ruled the swap position took the actual float of the stock below MSCI’s minimum threshold.
Another factor is active trading by Elektra’s broker in its own shares. Punto Casa de Bolsa, opened by Elektra in 2012, has traded the stock under the auspices of the company’s buyback fund, stock exchange filings show. Punto’s trading falls within limits for buyback funds in Mexico, where regulation on share repurchases is more lax than the U.S. In the last year, Punto traded 18% of Elektra’s total volume, behind only broker Grupo Bursatil Mexicano with 19%, according to data compiled by Bloomberg.
“Much of the trading is by firm hands,” Hermosillo said.
Pascoe said that the purpose of any buyback fund is “to give liquidity to its securities in the market when it considers it convenient.”
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